Summary

A judge's construction of a clause in a lease agreement which would have required an assigning tenant not merely to procure a new guarantee but also a new guarantor was incorrect. The judge was correct to regard the whole of the proviso in the clause as being avoided by the Landlord and Tenant (Covenants) Act 1995 s.25(1).

Facts

The appellant lessees (D) appealed against a decision ([2014] EWHC 2637 (Ch)) granting summary judgment to the respondent freeholders (T) on their claim for declaratory relief in relation to the interpretation of certain lease agreements.

D, who were associated companies in the Hilton group, were the lessees of hotels owned by T. D's obligations under the lease were guaranteed by Hilton. The hotel leases contained in clause 3.14 two covenants against assignment of the whole of the demised premises. The first was clause 3.14.3 which was general in its terms and enabled the landlords to take advantage of the Landlord and Tenant Act 1927 s.19(1A) by withholding consent in any one of the four circumstances specified in clause 3.14.4 and by imposing as a condition of giving consent any one or more of the conditions set out in clause 3.14.5. The effect of those provisions was to entitle T to limit any assignments to a company of sufficient financial standing and business competence with the benefit of a substantial new guarantee and/or an authorised guarantee agreement by the outgoing tenant. Clause 3.14.6 prevented assignment to an associated company of the tenant without T's consent, provided that for the purposes of s.19(1A) T was entitled to impose two possible conditions: (a) the obligation to give notice of the completed assignment and (b) the requirement that the tenant "shall procure that the Guarantor and any other guarantor of the Tenant" shall enter into a deed of covenant in the terms of the Sixth Schedule" which contained the guarantee provisions. D assigned each of the hotel leases to £1 subsidiary companies as part of a corporate restructuring without seeking and obtaining T's consent. D intended that they would thereby be released from further contractual liability under the leases as would Hilton as guarantor of those liabilities as a result of the Landlord and Tenant (Covenants) Act 1995 s.5 and s.24(2). The judge granted T's application for summary judgment and decided that the assignments were in breach of clause 3.14 of the leases so that they were excluded assignments within s.11 of the 1995 Act. He made a declaration that, under clause 3.14.6, D were not permitted to assign the leases without first applying for T's consent and that T were entitled, as a condition of giving consent, to require compliance with the two conditions (a) and (b). His construction of (b) was that it entitled the landlords to require the assigning tenants to procure a new and suitable guarantor in place of Hilton. D accepted that the assignments were not lawful and that under s.11 they were therefore ineffective to release D from their covenants under the leases and Hilton from its guarantee obligations. The issue was whether the judge's construction of clause 3.14.6(b) was correct. D criticised the judge's reasoning that the commercial construction of the clause had to be driven by the consequences of the application of the 1995 Act and his reliance on the principle to "validate if possible".

Held

(1) The maxim "verba ita sunt intelligenda ut res magis valeat quam pereat" or "to validate if possible" was not devised as a means of avoiding the consequences of legislation being applied to a contract. It was not possible to apply it in order to create an interpretation of a contract which could not be justified on ordinary principles of construction, WN Hillas & Co Ltd v Arcos Ltd (1932) 43 Ll. L. Rep. 359 followed. As a matter of ordinary language, the reference to "the guarantor and any other guarantor of the tenant" denoted the persons who at the time of the assignment were the guarantors of the tenant's obligations under the lease. The condition imposed on the tenant was no more than that he should procure a new guarantee from those persons. T's construction, which was accepted by the judge, required the assigning tenant not merely to procure a new guarantee but also a new guarantor. There were real difficulties with that construction. The judge's construction was incorrect. The "validate if possible" principle had no application and did not justify the judge's construction (see paras 29-36 of judgment). (2) Section 25(1)(a) of the 1995 Act invalidated any agreement relating to a tenancy which would have effect to exclude, modify or otherwise frustrate the operation of the Act. A condition which required a tenant to procure a continuing guarantee from an existing guarantor had that effect. Section 25(1) was not only engaged when the power to impose condition (b) was exercised. The two conditions were not independent and self-sufficient and so (b) could not be removed. The obvious solution which respected the structure of the agreement and gave effect to s.25(1) was to regard, as the judge did, the whole of the proviso as being avoided by the legislation. That realistically treated the proviso as a complete term of the contract and left clause 3.14.6 as a qualified covenant against assignment which could be operated according to its terms. The judge's order should be varied accordingly (paras 43, 48-50).